Barking Up The Wrong Tree

As manufacturers of precision machined products, many of you have been hurt badly in the last few years. The source of much of that hurt is created by influences that you have little or no influence over.

Foreign-based competitors that take advantage of low labor rates in their local economy, tax rates and tariff protection that create a one-way flow of goods and services, and artificially maintained weak currencies are all conspiring to create a state of siege on U.S.-based manufacturing. The result of this is a tsunami of low cost, high quality products pounding our shores relentlessly.

National currency, particularly in China, is undervalued compared to the U.S. dollar—in some cases as much as 30 percent. That means, of course, that any attempts to export our goods to their market are immediately at a 30 percent competitive disadvantage, while their goods cost our consumers 30 percent less. That’s just factoring in the currency undervaluation. Labor rates, health and welfare costs, and product liability expenses are mostly insignificant in China and Southeast Asian markets adding more cost advantage versus our fixed costs.

Then there is the VAT (value added tax) that many countries slap on imported products. The VAT can add as much as 17 percent to our exports while many of the local competitors find loopholes to skirt the VAT in their local markets.

This grim litany speaks to the current world we’re stuck with. All of the above issues are ones where governments have played a role. To some extent, it’s a matter of attitude. Their governments value exports and realize what they do for a nation’s economic welfare. Our representatives seem to take either a neutral or negative stance toward helping companies compete domestically and internationally. Perhaps our attitude is a vestige of laissez-faire policies, or maybe it’s a result of more influential interests focusing on short-term gains.

Trying to face this mess, many of our domestic companies look to the government and our trade associations for help. It’s a natural response because many of our international competitive disadvantages stem from how our government handles trade issues. I support the work of individuals, associations and manufacturing lobbies in any effort to get the ear of trade policy makers. However, it’s obvious after what our industry continues to slog through that this ear has its hearing aid turned way down.

Many of our government macro economists are in favor of a strong dollar. They believe it helps encourage foreign investment in our stocks and bond markets. They also believe it encourages foreign investment in U.S. real estate and helps keep that market strong. So, even though the current artificial value of the Chinese Yuan violates WTO policy, the odds that it will soon be more favorably valued are long at best.

And huge on our laundry list are social costs to our domestic manufacturers. Who realistically believes that the government is going to do anything soon about the soaring costs of health and other benefits that have a large impact on small to medium size manufacturers—not to mention liability reform? For years talk about tort reform has echoed and faded from the halls of government, shouted down by the various advocacy groups that, most being trial lawyers, have louder mouths.

I don’t look to Washington for the answers to our industry’s problems—certainly not within a meaningful time frame. We must fix this ourselves, and paramount to that repair is to evaluate how we do our business. There is no constitutional guarantee that gives us the right to do what we have always done. What we do have in this country is the freedom to change. American manufacturers are the most creative on the planet. Our competitors are not invincible. They have weaknesses that need identification and exploitation. It’s always been easier to copy than to create.